McDonald's looks at tinkering with aspects of Dollar Menu

Price increase for McDouble, add-on options on McChicken considered

McDonald’s was criticized for a dearth of new premium products last year and the Extra Value Menu, which raised the price on small fries and other items. (EMMANUEL DUNAND, AFP/Getty Images)

Faced with rising costs and unrelenting pressure to improve its performance, McDonald's is tinkering with aspects of its vaunted Dollar Menu, testing a price increase for its McDouble sandwich and add-on options like bacon on the McChicken sandwich for an extra cost.

The tests, which include adding some new items, are taking place in several markets outside Chicago.

The moves reflect a tricky contradiction at the heart of Oak Brook-based McDonald's business: The Dollar Menu is crucial to the company's success because it lures so many people to its stores, but it has gotten more expensive to maintain.

Commodity and other costs keep increasing, the company said, and its franchisees face higher health care insurance-related expenses as a result of the Affordable Care Act.

McDonald's executives express commitment to the Dollar Menu, home to everything from a cup of coffee or yogurt parfait to a fried chicken sandwich for a buck. But they're also willing to experiment, which is evident in the testing of what the company refers to as the "Dollar Menu and More."

Neil Golden, chief marketing officer for McDonald's USA, described the menu as building on Dollar Menu stalwarts like the McChicken sandwich by adding a second price tier at $1.79 or $2, offering add-ons like bacon or an extra patty for a hamburger.

The new sandwiches will be "more attractive to customers" and "more profitable for our restaurants," Golden said.

McDonald's is also looking at additional sandwiches for $1, such as a Southwest burger with white cheddar, barbecue ranch sauce and tortilla strips.

"One of McDonald's brand attributes is value," said David Palmer, an analyst with UBS. "What they're doing now is saying, 'All right, we're going to stay committed to dollar,' but they're trying to take pressure off (franchisees) by adding value options that encourage customers to trade up."

McDonald's Dollar Menu, credited as a cornerstone of the chain's turnaround a decade ago, accounts for less than 15 percent of U.S. sales. While the chain has tinkered with ways to raise prices through the years, little has changed on its Dollar Menu, in part because it's a proven traffic driver. That also has made the menu like golden handcuffs.

Doug Adcock, who heads a committee that represents franchisee interests regarding McDonald's value offerings, said in an interview that while "it's no secret" that costs have risen during the past decade, "the challenge is how do you meet those increased costs, and how do you grow your business in a profitable way?"

McDonald's operates 10 percent of its 14,000 U.S. restaurants, meaning the bulk of its overhead costs, such as labor, utilities and ingredients, is shouldered by 3,100 independent franchisees, who pay royalties to the company.

The Dollar Menu and More will be tested in Albuquerque, N.M., Memphis, Tenn., Columbia, S.C., Fresno, Calif., and Hartford, Conn.

As part of the test, McDonald's spokeswoman Danya Proud said the chain will also be testing its McDouble cheeseburger at prices in excess of $1, depending on the market. The test prices weren't immediately available, and Proud said the higher-priced McDouble will not be advertised. The chain has offered some kind of two-patty burger with cheese for $1 for 10 years.

"It's very clear that the $1 price point is becoming a very difficult positioning for a restaurant," said Darren Tristano, executive vice president of Technomic, adding that in order to make the price work, the product gets smaller.

"Most major brands are trying to promote value above $1," he said.

Competitors like Burger King and Wendy's have raised the price on double cheeseburgers well past $1.

Golden said every item on the Dollar Menu has remained profitable, but he also said there were numerous cost-related pressures that McDonald's needed to address, including higher labor and commodity costs, and expenses related to restaurant remodeling. He added health care and insurance costs to the list.

Despite the Dollar Menu's importance, Golden indicated the company doesn't think it is prohibited from raising prices.

"When McDonald's was founded, 15-cent hamburgers were the norm, Egg McMuffins were introduced at 99 cents, we've had hamburger Happy Meals at $1.99, hamburgers at 59 cents, and on and on and on," Golden said. "We've made adjustments along the way in terms of specific products and the prices we have offered that represent great value for the customer."

McDonald's is battling back from some months of slipping sales since the fall, the first ones seen in nearly a decade. Although sales have been declining throughout the restaurant industry, McDonald's was criticized for a dearth of new premium products last year and the Extra Value Menu, which raised the price on small fries and other items.